Controversial plans to decentralise the welfare state by giving councils the right to set their own regional levels of benefit are being considered by the Tories.

The ideas, floated under the John Major government in 1995 but rejected as too radical, are being examined as part of David Cameron's push to devolve as much power as possible to the local level and away from Whitehall. They would mean councils being handed a lump sum from Whitehall to spend as they want on welfare and employment programmes, rather than the entire system being driven centrally, with uniform benefit levels being set nationally.

Last night Lord Hanningfield, a Tory spokesman on business in the Lords and leader of Essex County Council, said the changes would mean money being spent more efficiently and according to local needs. "From David Cameron down, I think everyone believes this sort of thing should be looked at," he said.

His preference would be for local authorities to determine for themselves how much should be spent on benefits and employment programmes, and who would be eligible. Councils would be free to set benefit levels according to people's ages and the local cost of living. "The cost of living is far higher in Essex, say, than it is in Cornwall, so people do not need the same level of benefit," he said. "And someone who is 17 does not need the same amount as someone who is 30."

Such ideas will prove highly controversial and are likely to face intense opposition from trade unions.

Last night the employment minister, Jim Knight, accused the Tories of planning a postcode lottery for benefits. "The Conservatives' policies would mean that people on one side of the street would be worse off than people on the other side.

"We do not agree with postcode lotteries – which is why we rejected the idea of a regional minimum wage and which is why we reject the idea of local determination of benefit levels.

"Labour believes in the principle of fairness, where people are supported according to their needs."

But the ideas are gaining support on the right of the Tory party. In their book, The Plan, the Tory MEP Daniel Hannan and the MP Douglas Carswell cite reforms in the US in the 1990s, under which responsibility for social security was shifted from the federal government to the states, as a model.

"Offered the freedom to experiment, the states seized it with gusto. Some incentivised employers to take on the workless; others organised schemes themselves; most made the receipt of benefits conditional on taking up job offers. Best practice quickly spread, as states copied what worked elsewhere. At the same time, no state could afford to carry on as before, signing cheques with a minimum of questions asked," they say.